B-50198, JULY 26, 1945, 25 COMP. GEN. 118

B-50198, JULY 26, 1945, 25 COMP. GEN. 118

CONTRACTS - COST-PLUS - INSTITUTIONAL OR INDUSTRIAL ADVERTISING EXPENSES INSTITUTIONAL OR INDUSTRIAL ADVERTISING EXPENSES INCURRED BY A COST PLUS- A-FIXED-FEE AIRCRAFT CONTRACTOR IN ORDER TO OFFER FINANCIAL SUPPORT TO TRADE AND TECHNICAL JOURNALS DISSEMINATING TRADE AND TECHNICAL INFORMATION OF INTEREST TO THE AIRCRAFT INDUSTRY ARE NOT REIMBURSABLE UNDER A CONTRACT PROVIDING FOR DETERMINATION OF ALLOWABLE ITEMS OF COST IN ACCORDANCE WITH TREASURY DECISION 5000.

COMPTROLLER GENERAL WARREN TO COL. W. GRITZ, U.S. ARMY, JULY 26, 1945:

THERE HAS BEEN RECEIVED BY REFERENCE FROM THE FISCAL DIRECTOR, ARMY SERVICE FORCES--- WITH A REQUEST THAT AN ADVANCE DECISION BE RENDERED AS TO WHETHER PAYMENT THEREON IS AUTHORIZED--- RECLAIM VOUCHER NO. 2 IN THE AMOUNT OF $6,030.09 IN FAVOR OF THE FIRST NATIONAL BANK IN ST. LOUIS MISSOURI, AS ASSIGNEE OF THE MCDONNEL AIRCRAFT CORPORATION UNDER CONTRACT NO. W 535-AC-21218, DATED SEPTEMBER 30, 1941. THE AMOUNT, WHICH REPRESENTS THE EXPENSE OF TRADE JOURNAL AND OTHER ADVERTISING APPORTIONED TO THE CONTRACT INVOLVED FOR THE PERIOD APRIL 1, 1941, TO MARCH 31, 1944, WAS PREVIOUSLY PAID BUT, DUE TO AN EXCEPTION TAKEN THERETO BY THE AUDIT DIVISION OF THE GENERAL ACCOUNTING OFFICE, WAS RECOVERED BY THE GOVERNMENT BY MEANS OF SUBSEQUENT VOUCHER DEDUCTIONS.

THE CONTRACT INVOLVED, AS AMENDED AND SUPPLEMENTED, PROVIDES FOR THE MANUFACTURE AND DELIVERY BY THE CONTRACTOR TO THE GOVERNMENT OF AIRPLANES, PARTS, MODELS AND DATA MORE PARTICULARLY DESCRIBED THEREIN, IN CONSIDERATION OF THE REIMBURSEMENT BY THE GOVERNMENT OF THE CONTRACTOR'S COSTS, PLUS A STIPULATED FIXED FEE. RELATIVE TO REIMBURSEMENT FOR EXPENDITURES, ARTICLE 3 OF THE CONTRACT CONTAINS, AMONG OTHERS, THE FOLLOWING PROVISIONS.

(B) FOR PURPOSES OF DETERMINING THE AMOUNT PAYABLE TO THE CONTRACTOR UNDER THIS CONTRACT, ALLOWABLE ITEMS OF COST WILL BE DETERMINED BY THE CONTRACTING OFFICER IN ACCORDANCE WITH REGULATIONS FOR THE DETERMINATION OF THE COST OF PERFORMING THE CONTRACT AS PROMULGATED BY THE TREASURY DEPARTMENT IN SECTION 26.9 OF CHAPTER I OF TITLE 26 OF CODE OF FEDERAL REGULATIONS AS CONTAINED IN T.D. 5000 AND APPROVED BY THE SECRETARY OF WAR, AUGUST 2, 1940. IT BEING UNDERSTOOD AND AGREED WITHOUT LIMITING THE GENERALITY OF THE FOREGOING THAT:

(3) ALL OTHER ITEMS OF COST AS SHOULD IN THE OPINION OF THE CONTRACTING OFFICER BE INCLUDED IN THE COST OF THE WORK TO BE PERFORMED SHALL BE CONSIDERED AS ALLOWABLE ITEMS OF COST HEREUNDER.

PERTINENT PROVISIONS OF T.D. 5000, REFERRED TO IN THE CONTRACT, PROVIDE AS FOLLOWS:

SEC. 26.9 COST OF PERFORMING A CONTRACT OR SUBCONTRACT.--- (A) GENERAL RULE.--- THE COST OF PERFORMING A PARTICULAR CONTRACT OR SUBCONTRACT SHALL BE THE SUM OF (1) THE DIRECT COSTS, INCLUDING THEREIN EXPENDITURES FOR MATERIALS, DIRECT LABOR AND DIRECT EXPENSES INCURRED BY THE CONTRACTING PARTY IN PERFORMING THE CONTRACT OR SUBCONTRACT; AND (2) THE PROPER PROPORTION OF ANY INDIRECT COSTS (INCLUDING THEREIN A REASONABLE PROPORTION OF MANAGEMENT EXPENSES) INCIDENT TO AND NECESSARY FOR THE PERFORMANCE OF THE CONTRACT OR SUBCONTRACT.

(J) ALLOCATION OF INDIRECT COSTS.--- NO GENERAL RULE APPLICABLE TO ALL CASES MAY BE STATED FOR ASCERTAINING THE PROPER PROPORTION OF THE INDIRECT COSTS TO BE ALLOCATED TO THE COST OF PERFORMING A PARTICULAR CONTRACT OR SUBCONTRACT. SUCH PROPER PROPORTION DEPENDS UPON ALL THE FACTS AND CIRCUMSTANCES RELATING TO THE PERFORMANCE OF THE PARTICULAR CONTRACT OR SUBCONTRACT. SUBJECT TO A REQUIREMENT THAT ALL ITEMS WHICH HAVE NO RELATION TO THE PERFORMANCE OF THE CONTRACT OR SUBCONTRACT SHALL BE ELIMINATED FROM THE AMOUNT TO BE ALLOCATED, THE FOLLOWING METHODS OF ALLOCATION ARE OUTLINED AS ACCEPTABLE IN A MAJORITY OF CASES: (ITALICS SUPPLIED.) THUS, AS A CONDITION PRECEDENT TO REIMBURSEMENT, IT IS CLEAR THAT ANY INDIRECT COSTS INCURRED BY THE CONTRACTOR MUST BE SHOWN TO BE INCIDENT TO AND NECESSARY FOR THE PERFORMANCE OF THE CONTRACT WORK.

IN A STATEMENT DATED APRIL 25, 1945, FILED IN SUPPORT OF THE RECLAIM VOUCHER, THE CONTRACTOR CITES VARIOUS REASONS FOR INCURRING THE EXPENSE INVOLVED, WHICH REASONS MAY BE SUMMARIZED AS BEING THAT ADVERTISING OF AN INDUSTRIAL OR INSTITUTIONAL CHARACTER IS PLACED IN TRADE OR TECHNICAL JOURNALS NOT FOR THE OBJECT OF SELLING PARTICULAR PRODUCTS BUT ESSENTIALLY FOR THE PURPOSE OF OFFERING FINANCIAL SUPPORT TO SUCH TRADE OR TECHNICAL JOURNALS BECAUSE THEY ARE OF GREAT VALUE FOR THE DISSEMINATION OF TRADE AND TECHNICAL INFORMATION IN THE AIRCRAFT AND PLASTICS INDUSTRIES; THAT THE PRIMARY PURPOSE OF SUCH JOURNALS IS TO DISTRIBUTE TO THE INDUSTRY TRADE AND TECHNICAL INFORMATION OF INTEREST IN THE INDUSTRY; THAT THE INFORMATION CONTAINED THEREIN HAS BEEN OF DEFINITE BENEFIT IN THE PERFORMANCE OF THE CONTRACTOR'S VARIOUS CONTRACTS; AND THAT THE EXPENSES OF ADVERTISING WERE INCURRED IN RELIANCE UPON RULINGS MADE FROM TIME TO TIME BY THE RESIDENT AUDITORS OF THE ARMY AIR FORCES, WITH THE APPROVAL OF THE CONTRACTING OFFICER, THAT SUCH EXPENDITURES CONSTITUTE REIMBURSABLE COSTS UNDER THE COST PLUS-A-FIXED-FEE CONTRACT. IN THIS LATTER CONNECTION, THE CONTRACTOR STATES THAT IT RELIED UPON COST INTERPRETATION, S.C.I. NO. 14, ISSUED BY THE WAR DEPARTMENT, WHICH BULLETIN PURPORTS TO AUTHORIZE REIMBURSEMENT TO COST-PLUS-A-FIXED-FEE CONTRACTORS FOR COSTS IN CONNECTION WITH ADVERTISING OF AN INSTITUTIONAL CHARACTER (AS CONTRASTED WITH ADVERTISING OF PRODUCTS FOR SALE) PLACED IN TECHNICAL JOURNALS. ALSO, IT IS CONTENDED THAT RELIANCE WAS PLACED UPON A DECISION RENDERED BY THE BOARD OF CONTRACT APPEALS, WAR DEPARTMENT, WHEREIN IT WAS HELD THAT, UNDER CONTRACTS SIMILAR TO THE ONE HERE INVOLVED, ANOTHER CONTRACTOR--- HIGGINS AIRCRAFT, INC.--- PROPERLY WAS ENTITLED TO REIMBURSEMENT FOR THE EXPENSE OF PUBLICATION OF ADVERTISEMENTS IN AIRCRAFT TRADE JOURNALS ON THE GROUND THAT SUCH EXPENSE WAS AN INDIRECT COST INCIDENT TO AND NECESSARY FOR THE CONTRACT WORK.

WHILE IT MAY BE THAT THE INSTANT MATTER FALLS WITHIN THE PURVIEW OF S.C.I. 14, SUPRA, IT MAY BE STATED AT THE OUTSET THAT SAID COST BULLETIN CANNOT BE ACCEPTED AS CONTROLLING IN CONNECTION WITH THE DETERMINATION OF THE VALIDITY OF THE CLAIM, SINCE, AS WAS POINTED OUT IN OFFICE DECISION OF AUGUST 15, 1944, 24 COMP. GEN. 125, THE RIGHTS AND LIABILITIES OF THE PARTIES TO COST-PLUS-A-FIXED-FEE CONTRACTS WITH THE GOVERNMENT, AND THE EXTENT TO WHICH REIMBURSEMENT CAN BE SAID TO BE AUTHORIZED THEREUNDER, MUST BE DETERMINED PRIMARILY ON THE BASIS OF THE TERMS OF THE PARTICULAR CONTRACT INVOLVED. LIKEWISE, AND FOR THE SAME REASON, THE REFERRED-TO DECISION OF THE BOARD OF CONTRACT APPEALS, WAR DEPARTMENT, UNDER A CONTRACT SIMILAR TO THE ONE HERE INVOLVED, CANNOT BE ACCEPTED AS CONSTITUTING A FINAL DETERMINATION AS TO THE LEGALITY OF REIMBURSEMENT FOR EXPENSES INCURRED FOR INDUSTRIAL OR INSTITUTIONAL ADVERTISING.

WHILE THE DESIRABILITY OF OFFERING FINANCIAL SUPPORT TO CERTAIN TRADE AND TECHNICAL JOURNALS IN ORDER THAT INFORMATION OF INTEREST MAY BE DISTRIBUTED THROUGHOUT THE AIRCRAFT INDUSTRY IS READILY APPARENT, I AM UNABLE TO AGREE THAT SUCH AN EXPENSE IS SO CLOSELY ASSOCIATED WITH THE PERFORMANCE OF THE CONTRACT INVOLVED AS TO WARRANT THE CONCLUSION THAT IT WAS INCIDENT TO OR NECESSARY FOR THE PERFORMANCE OF THE CONTRACT, AS REQUIRED BY PARAGRAPH (A), SECTION 26.9 OF T.D. 5000, SUPRA. TO THE CONTRARY, ANY COMPENSATING BENEFIT WHICH MAY HAVE ACCRUED TO THE GOVERNMENT AS A RESULT THEREOF WOULD APPEAR TO BE THEORETICAL RATHER THAN REAL.

HOWEVER THAT MAY BE, AND CONCEDING ARGUENDO THAT THE RENDERING OF FINANCIAL SUPPORT TO THE VARIOUS TRADE AND TECHNICAL JOURNALS BY MEANS OF ADVERTISING WAS DEEMED BY THE CONTRACTOR AS BEING NECESSARY TO THE SATISFACTORY PERFORMANCE OF THE CONTRACT, IT BY NO MEANS FOLLOWS THAT THE EXPENSES INCURRED IN CONNECTION THEREWITH REPRESENT REIMBURSABLE COSTS UNDER THE CONTRACT. THE CONTRACTOR STATES THAT THE PRIMARY PURPOSE OF EACH OF THE PUBLICATIONS INVOLVED IS TO DISTRIBUTE TRADE AND TECHNICAL INFORMATION OF INTEREST TO THE AIRCRAFT AND PLASTICS INDUSTRIES. HOWEVER, THERE MAY NOT BE OVERLOOKED THE FACT THAT IT IS THE CONTRACTOR'S RESPONSIBILITY TO EFFECTIVELY AND INTELLIGENTLY PERFORM THE CONTRACT AND TO BEAR THE BURDEN OF SUCH EXPENSES AS NECESSARILY MAY BE INCURRED IN ORDER TO ACQUIRE THE KNOWLEDGE AND ABILITY TO DO SO. THE RULE IS WELL ESTABLISHED THAT WHERE A COST-PLUS A-FIXED-FEE CONTRACTOR OBTAINS THE TECHNICAL KNOWLEDGE OR "KNOW-HOW" NECESSARY TO FULFILL ITS OBLIGATIONS UNDER ITS CONTRACT, THE COST THEREOF IS TO BE BORNE BY IT OUT OF ITS FIXED FEE, IN THE ABSENCE OF SPECIAL CIRCUMSTANCES OR CONTRACTUAL PROVISIONS REQUIRING A CONCLUSION OTHERWISE. SEE B-46142, MARCH 19, 1945, CITING CENTRAL CONSTRUCTION CORPORATION V. UNITED STATES, 63 C.1CLS. 290, 296.

FOR THE FOREGOING REASONS, I AM UNABLE TO FIND ANY LEGAL BASIS FOR HOLDING THAT THE OBLIGATION OF REIMBURSING THE CONTRACTOR FOR EXPENSES IN CONNECTION WITH INDUSTRIAL OR INSTITUTIONAL ADVERTISING WAS UNDERTAKEN BY THE GOVERNMENT UNDER THE TERMS OF THE INSTANT CONTRACT.

ACCORDINGLY, YOU ARE ADVISED THAT PAYMENT ON THE INSTANT VOUCHER, RETURNED HEREWITH, IS NOT AUTHORIZED.